25 November 2010 | Ray Carter

One of the key problems of the continuing emphasis on cost reduction is the serious damage that it can do to the supply chain. But this doesn’t have to be the case, says Ray Carter

Given the current economic situation and the focus on saving money, a recent event we hosted on ‘sustainable cost reduction’ generated a lot of interest and plenty of debate.

The key issue I highlighted was the concept of cutting costs without damaging the supply chain. By ‘sustainable’ I mean reductions in cost – or increases in added value – that can be maintained over the longer term, not just simple short-term price changes that are then adjusted when the commercial climate improves. To effectively reduce costs, we need to adopt not only a cross-functional approach, but also engage with the supply chain community.

Without effective 
stakeholder buy-in, any cost reduction project is going to be very difficult 
to achieve. To facilitate this, I have developed 
a straightforward 
seven-step process, 
designed to enable costs 
to be identified and then 
reduced or removed from the supply chain.

Step 1: Spend 
management and 
compliance. We need to understand what is being procured, who is doing it and how. 
We often find good framework agreements, set up to ensure value for money, are not 
being used and that significant sums are still spent without due process.

Step 2: Identify the key cost drivers. 
We need to identify which element accounts for the largest proportion of costs. In training, for example, venue costs are often higher than the tuition element – the part that is the real added value.

Step 3: Value analysis. The systematic use of value analysis tools can reap excellent results. The focus on the real needs (as opposed to the demands) of stakeholders can dramatically reduce costs, while at the same time help to maintain functionality.

Step 4: Standardisation, collaboration 
and aggregation. These three factors speak for themselves. The value of reducing the 
variety of provision, combining group spend and working with sister organisations will 
all increase your leverage. Many organisations are already heading towards a more 
centralised approach to procurement to achieve the changes.

Step 5: Supply market analysis. The need 
to fully understand the suppliers and the marketplace is critical to success. It’s also important to increase competition and to understand the underlying 
economics. It’s no use seeking cost reductions in markets that are already lean and mean – far better to target those that have gained from years of complacency, restrictive practices and 
excessive profits. This includes 
a need to explore non-traditional markets and suppliers.

Step 6: Leverage the spend and the relationship. When going 
to the market, we need to not only leverage the spend, but 
also the relationship. Over the years many 
organisations have invested time and money in building effective relationships, so now 
is the time to reap the reward in terms of 
supplier co-operation and innovation.

Step 7: Measure the value. My advice is that this should be based upon a ‘no win, no fee’ type of payment model. But whatever resource is used to secure the reductions, they must exceed the cost of the activity.

Key points

• Identify the major source 
of costs and 
what creates most value
• Consider moving to a more centralised approach to procurement
• Ensure the savings achieved exceed the cost 
of implementing the activity

* Ray Carter, director at supply chain management consultants DPSS